November 5, 2023 by Dymphna

CBA puzzled by ‘extraordinary times’

Without this, would price falls have been bigger?

CBA Economists are privately a bit confused about the housing market’s current strength.

We got CoreLogic’s October update last week. It showed that the pace of gains remains strong, with prices up 0.9% in the month.

But there’s a puzzle. This strength is ‘quite remarkable’.

The turnaround in property prices since February has been quite remarkable.

Indeed, the lift in housing values occurred in the midst of the RBA’s tightening cycle (recall that the RBA increased the cash rate by 25bp in February, March, May and June 2023).

The RBA’s 400bp of tightening since May 2022 has reduced home borrower capacity by ~30%. But property prices are now back to their previous peak (reached in April 2022 – on the eve of the commencement of the RBA’s tightening cycle).

Housing affordability has declined significantly. The usual relationship between new lending and home prices has broken down (see below chart).

Housing loan commitments have fallen by around 30% since May 2022. A decline of this magnitude would ordinarily be expected to be accompanied by an ongoing decline in home prices. But these are extraordinary times.

Extraordinary? How so?

Well, first up, there’s been an unprecedented surge in immigration, which has driven vacancy rates to record lows, and rents through the roof:

But there has also been a strong pick-up in foreign property demand:

The net effect of these ‘extra-ordinary times’?

An extra-ordinary housing shortage:

Put simply there is a supply/demand imbalance in the housing market. Potential entrants into the housing market and renters feel the impact of this mismatch most acutely.

This would be my guess as well.

If immigration hadn’t picked up in such a massive way, and we hadn’t see the strong rebound in foreign buying – remembering that these often go hand in hand, as foreign nationals often buy houses for their kids when they’re studying here – but if we hadn’t seen this extra boost in demand, then my guess is that prices would have fallen further on the back of the RBA’s rate hikes.

As it is, the hikes have had muted impact, and foreign money keeps the demand side elevated.

But the question we’ve got to ask ourselves is what happens to prices once interest rates fall.

If property prices didn’t fall when interest rates were going up, will they not rise when interest rates fall?

No. It doesn’t work like that. Falling interest rates will see demand lift even further, and prices rise even higher.

Falling rates might not be as close as we were thinking a few weeks ago, but I still expect to see them sometime in 2024.

And that will only make the shortage worse.